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Monetary policy under financial uncertainty

  • Williams, Noah

Monetary policy may play a substantial role in mitigating the effects of financial crises. In this paper, I suppose that the economy occasionally but infrequently experiences crises, where financial variables affect the broader economy. I analyze optimal monetary policy under such financial uncertainty, where policymakers recognize the possibility of crises. Optimal monetary policy is affected during the crisis and in normal times, as policymakers guard against the possibility of crises. In the estimated model this effect is quite small. Optimal policy does change substantially during a crisis, but uncertainty about crises has relatively little effect.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 449-465

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:449-465
DOI: 10.1016/j.jmoneco.2012.05.006
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  9. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
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  11. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
  12. Svensson, Lars E. O. & Williams, Noah, 2006. "Bayesian and adaptive optimal policy under model uncertainty," CFS Working Paper Series 2007/11, Center for Financial Studies (CFS).
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  17. Svensson, Lars E O & Williams, Noah, 2007. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," CEPR Discussion Papers 6331, C.E.P.R. Discussion Papers.
  18. Ellison, Martin, 2006. "The learning cost of interest rate reversals," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1895-1907, November.
  19. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  23. John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
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